As wind and solar projects are planned around the country all stakeholders need to understand the limits of project insurance, writes Richard Nunny.
The Australian renewable energy market has been growing at pace in recent years, mainly accelerated by a number of government policies, such as the Renewable Energy Target scheme (RET), and the decreasing costs of renewable energy technology. In 2019, renewable energy contributed to more than 23% of Australia’s power generation, exceeding the country’s target of 20% for 2020 under the RET scheme. Individuals and companies, regardless of their business scale, are encouraged to invest in using renewable energy.
While the booming renewable energy market has unlocked opportunities for businesses and investments, the demand for related insurance has also increased. Last year saw a series of changes in the Australian renewable energy insurance sector, which has been underperforming for years. One thing remained constant: the trend towards further market hardening and rising rates. The reason is straightforward: increased claims activity has driven premium rates ever higher and resulted in insurers implementing more restrictive terms and conditions into contracts.
The rise in claims activity has been due to a variety of factors, from the increased severity and frequency of natural catastrophe events to ageing infrastructure and mechanical failures; problems are emerging across the whole value chain. Although not all of these are insurance-related, the high upfront costs involved for many renewables projects mean that accurate pricing of risk can help alleviate investor concerns. This in turn aids in getting projects off the ground and assists in smooth operation throughout their lifecycles.
In order to better understand the root causes behind rising insurance premiums, we used data provided by GCube Underwriting to analyse claims activity in the Australian renewable energy market between 2016 and 2020.
We found that claims activity has increased over the past few years, which correlates to increased project construction and scale of projects in the sector.
Damaged in transit
Generally, wind projects incur a greater number of claims and losses to insurers, as they are often larger facilities with a higher per-unit cost of major components. Wind farms also tend to be larger than solar plants, which means more revenue is at risk and therefore results in a higher percentage of monetary loss should the project experience delays for reasons such as mechanical failure.
The data also shows that the majority of claims tend to occur during the mobilisation, transportation and construction stages of renewable energy projects. This reflects the heightened risk during construction activities and the perils associated with marine and inland transit of equipment to project sites.
GCube examined claims from different sources, split between internal perils (such as, machinery/equipment failures) and external perils (such as, contractor/natural catastrophe). The findings demonstrated that solar projects are at less risk from internal perils, with more than 80% of claims incurred from external causes. This is predominantly and perhaps intuitively due to solar projects tending to be in areas that are prone to flood risks or that are more exposed to wind and/or hail. Another factor is the lack of moving parts: because of this, once constructed, there is less risk of mechanical failure for solar panels than there is for wind projects.
For wind projects, the picture looks slightly different, with the spread of claims between internal and external more balanced.
Mechanical breakdowns related to wind projects was the highest claim type by volume across both solar and wind projects, accounting for about 46% of all losses. According to GCube’s data, the evolution of turbine size over the five years to the end of 2020 corresponded to an increased risk of mechanical failures and construction errors. Additionally, as blades get larger, transportation risks increase as they need to be shipped in one piece, which furthers the logistical complexities.
As with solar projects wind turbines are subject to damage from external causes during operation, from general wear and tear to weather-related events. GCube further noted that one of the biggest contributing factors of the high mechanical breakdown claim volume arose from blade damage as a result of lightning strikes.
Contractor error accounted for significant claims activity for both wind and solar facilities, which has accounted for about 68% of claims quantum for solar projects and about 36% for wind projects. This has resulted in insurers seeking more information about new construction projects, including identifying the contracting parties involved in the projects and the extent of their prior experience on similar projects.
While contractor error and mechanical breakdown losses account for the majority of claims activity for wind and solar projects, the findings demonstrated that losses from these factors are compounded by claims occurring from natural catastrophe events including flood, hail, lightning and storm, which accounted for about 22% on solar arrays and about 10% on wind projects.
The rising levels of claims activity have resulted in insurers requesting more detailed underwriting information, most notably regarding contractor and sub-contractor experience, site location data and project design specification. This further information is being used to drive profitability back to a sector that has underperformed for a sustained period.
Renewable energy is a fast-growing industry and as it expands so too will the number claims as we see projects age, new technology developed and an increase in natural catastrophe events.
Stakeholders across the supply chain, including developers, owners, operators and financiers involved in the development of Australia’s renewable energy sector should engage with data provided by insurers to better understand the risks and opportunities available to them. Equally, insurers need to effectively communicate their knowledge and understanding to the broader marketplace in a way that is transparent and comprehensible. This will help all parties make informed decisions around renewable energy projects’ preparation, delivery and management.
The transition towards renewable energy generation is expected to continue, if not accelerate. As the renewable energy insurance market continues to tighten it will become vital to be aware of how insurers manage and price risk and the factors that impact their appetite for risk in order to promote and maintain confidence in the sector.
Richard Nunny is head of power and energy Australia at BMS Group.